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Clients increasingly positive but pricing-inflation balance may alter procurement

The latest supply chain survey from Gleeds shows confidence continuing to build but the industry is facing a delicate balancing act between cost inflation and competitive tendering.

Confidence in the marketplace is being restored and investors are feeling optimistic about future development opportunities, according to international construction consultancy Gleeds.  

The majority of contractor order books are ‘adequate’ or ‘full’ until the end of 2014 and further opportunities are expected from both the private and public sectors, with the private sector leading the way.

This increase in demand is tempered by pressure on the supply of labour and materials – a trend that has been growing since the third quarter of 2013.

Pressure on skills

Gleeds’ latest supply chain market survey suggests the skills shortage is still a major concern, with contractors feeling increasing pressure to quickly replenish their resources.

Although 83 per cent of those surveyed confirmed they were currently recruiting, a lack of investment and training throughout the recession is slowing contractors’ ability to respond to shortages.

Have you experienced shortages of construction trades May 14 Gleeds

Source: Gleeds

Consequently, labour costs are rising – something that is likely to intensify over the next six months. In addition, the increase in construction activity has put pressure on sourcing materials.

Two-thirds of contractors surveyed are experiencing longer lead-in times, particularly for aggregates, bricks, blocks, cladding, MEP equipment and steel.

Eighty-eight per cent of survey respondents considered material prices to have increased over the previous six months, an upward trend which is predicted to continue over the next 12 months.

Realistic pricing problem

In light of the rising market, some contractors are finding it difficult to realistically price projects through a single-stage procurement route, particularly where works are highly complex, have a long duration or are high in value.

As a result, tender price inflation for single-stage procurement may be higher than inflation allowances for two-stage procurement.

Many contractors believe clients could receive more competitive bids and greater value for money if a two-stage approach were followed.

A shift towards more two-stage tendering or negotiation of contracts is therefore anticipated.

Top 10 sectors in which respondents are active May 14 Gleeds

Source: Gleeds

Looking at individual sectors, commercial offices, education and health continue to lead market growth.

Movement in sector activity since Q3 2013 indicates emerging opportunities in the retail and industrial sectors, with a number of larger schemes undergoing procurement.

Student accommodation continues to show high levels of investment, though projects are slow in coming through the tender process. 

Tender numbers

There is a degree of stabilisation in relation to prelims, overheads and profit applied to tenders. Prelims continue to sit around the 6 to 11 per cent mark, with little movement since the end of last year.

Profits and overheads applied to tenders May 14 Gleeds

Source: Gleeds

The level of overheads and profit applied to tenders is less sporadic, with rates of 4 to 6 per cent most commonly applied. Clients remain driven by lowest-price tenders, reflecting the ongoing competitive nature of the market.

While contractors may be able to apply lower rates as a result of increasing opportunities, the possibility of insufficient resources when contracts go live significantly increases risk.

BIM drive intensifies

The adoption of building information modelling processes and technologies is slowly increasing, with 62 per cent of survey respondents claiming to have already adopted or be working towards the adoption of BIM, in line with the principles of PAS1192-2:2013.

This represents an eight-point increase from the last two surveys.

Projects designed and or built using BIM May 14 Gleeds

Source: Gleeds

There was a small increase in the number of BIM-designed or constructed projects.

Those that responded that ‘most’ projects were designed and/or constructed using BIM were mainly national or international contractors operating on a multi-sector basis.

Those who are adopting BIM consider the fundamental benefits to be:

  • Consistency between design, construction and operation phases;
  • Collaboration between client and project teams;
  • Understanding of achievable cost/programme/performance parameters;
  • Adaptable use of data throughout the whole life of an asset;
  • Improved project and risk management.

The three main barriers to implementation were considered to be cultural change or the learning curve; capital and training cost; and lack of awareness.

Delicate tendering balance

The overall market is experiencing heightened activity, with clients demonstrating greater confidence, but through low-priced or competitive tendering.

Contractors are finding it increasingly difficult to strike a balance between predicted tender price inflation and delivering a competitive tender when pricing.

A shift in procurement is expected, which may allow contractors greater flexibility and offer clients enhanced value for money.

Pressure for labour and resources continues. The industry-wide skills shortage is inhibiting the speed of growth and ultimately pushing labour costs upwards.

Likewise, demand for materials is resulting in longer lead-in times and higher costs – a trend which is expected to continue for the remainder of the year.

Helen Thompson is research and development consultant at Gleeds

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